The effect of an increased excise tax on alcohol consumption

Abstract

In September 2020, the Swedish government announced the ambition to further raise the tax on alcohol and tobacco products. The new policy, planned to be enacted in January 2023, aims to adjust for inflationary measures while promoting public health and increasing government revenue. The generated tax funds will partly be used for military expenditures. This thesis investigates the impact of the aforementioned proposed alcohol tax increase on the consumption of alcohol, as well as the tax revenue generated. In order to provide an answer to the effectiveness of the new legislation, the price elasticities of demand for alcohol need to be obtained. We focused on three different alcoholic products; spirits, wine and beer. Through the use of OLS regressions of different complexities, we find that the demand for beer and wine have a negative, yet overall inelastic demand. The results for spirits, however, are not as definitive due to ambiguous estimates caused by the limitations of the empirical framework. If we have managed to correctly estimate the price elasticities of demand, then the consumption of beer and wine will not be affected to a great extent when a hypothetical tax increase is imposed, but it does however raise important questions regarding the fiscal impact and the role of the government.